kenya’s listed insurance companies analysis cytonn fy’2015 ... · the insurance regulatory...

Kenya’s Listed Insurance Companies Analysis

Cytonn FY’2015 Insurance Sector Report

“Given turbulence in banking, is all well in insurance?”

4th May 2016

2 2

Table of Contents

I.  Introduction to Cytonn Investments

II.  Economic Review and Outlook

III.  Kenya Insurance Sector Overview

IV.  Cytonn’s Insurance Sector Report

A.  Executive Summary

B.  Insurance Sector Report

V.  Appendix

A.  Metrics Used - Definitions

B.  Listed Insurance Companies

C.  Investments & Research Team

3 3

I. Introduction to Cytonn Investments

4 4

Client Focus Drives the Team

2011

2012

2013

5 5

Introduction to Cytonn Investments Cytonn Investments is an independent investments management company

•  Our mission is that “we work to deliver innovative & differentiated financial solutions that

speak to our clients needs”

•  Cytonn Investments is differentiated in several respects:

1.  Independence & Investor Focus: Cytonn is solely focused on serving the interest of clients, which is best done on an independent investment management platform to minimize conflicts of interest

2.  Alternative Investments: Specialized focus on alternative assets - real estate, private equity, and structured products

3.  Partnerships with Global Institutional Investors: Such as Taaleritehdas of Finland

4.  Strong Alignment: Every staff member participates in ownership. When clients do well, the firm does well; and when the firm does well, staff do well

6 6

Cytonn’s Corporate Structure – Kshs 53 Bn Under Mandate

•  Financial Services • Education • Technology

• Diaspora platform connecting investors in the diaspora with opportunities in the East African Region

• Development affiliate providing investment grade real estate development solutions

Cytonn Investments

Cytonn Investments

Ltd

Cytonn Real Estate

Cytonn Diaspora

Cytonn Investments

LLC •  Independent

investment management company, serving HNW & institutional clients

• US advisory and investment management company

Kenya United States

Private Equity

7 7

Board of Directors The board is comprised of 10 members from diverse backgrounds, each bringing in unique skill-sets

Prof. Daniel Mugendi, Chairman

Antti – Jussi Ahveninen, Non-executive Director

Madhav Bhalla, Non-executive Director

James Maina, Non-executive Director

Nasser Olwero, Non-executive Director

Mike Bristow, Non-executive Director

Edwin H. Dande, Managing Partner & CEO

Elizabeth N. Nkukuu, Partner & CIO

Patricia N. Wanjama, Partner & Head of Legal

Kenneth Ndura Non-executive Director

8 8

The Management Team The team brings in diverse global and local experience

Edwin H. Dande, Managing Partner & CEO

Elizabeth N. Nkukuu, Partner & CIO

Patricia N. Wanjama, Partner & Head of Legal

Maurice Oduor, Finance and Investment Manager

Johnson Denge, Real Estate Services Manager

Robert M. Mwebi, Project Manager

Shiv Arora, Head of Private Equity Real Estate

Gaurang Chavda, Head of Private Wealth Management

Winfred Ndung'u, Brand & Business Administration Manager

Beverlyn Naliaka, PR & Communication

Martin Gitonga Project Manager

9 9

Cytonn Investment Solutions We offer differentiated investment solutions in four main areas

High Yield Solutions

�  The Team’s expertise and market knowledge enable us to offer investors higher yields than the market

average

�  Regular credit analysis, quick dealing capability and the large banking spread in the market allow the

team to capitalize on investment opportunities

Real Estate Investment Solutions

�  Our unique strategic partnerships with Cytonn Real Estate, our development affiliate, enables us to find,

evaluate, structure and deliver world class real estate investment products for investors

�  Our platform connects global capital seeking attractive return with institutional grade development

opportunities in the East African region

Private Regular

Investment Solutions

�  We understand that investors have varying financial goals. Our highly customized and simple to

understand investment products will enable you to achieve your investment objective

�  We offer solutions to both local investors, and those in the diaspora interested in the investment

opportunities back in Kenya and the region

Private Equity

�  Cytonn seeks to unearth value by identifying potential companies and growing them through capital

provision and partnering with their management to drive strategy

�  We primarily invest in the Financial Services, Education and Technology sectors

10 10

Cytonn focuses on the highest returning Asset Class Traditional investments returning 10.6% compared to 25% for real estate, & projected to continue

Per

ann

um R

etur

n, 5

Yea

r A

vera

ge 25%

12.3%

10% 9.6%

0%

5%

10%

15%

20%

25%

30%

Real Estate 10 Year Treasury Bond Yield NASI 91 Day T-‐Bill

Average = 14.2%

11 11

Global view of economic growth determines regions of focus There is demand from global capital (light colors) looking for attractive returns (dark colors)

12 12

Key themes driving our property development

KEY THEME REAL ESTATE SECTOR PROVIDING EXPOSURE TO KEY THEME

Master Planned Communities

Commercial Office Parks

Commercial Mixed-Use

Suburban Malls

Three Star Hotels

1. Large Housing Deficit P P 2. Growth of Middle Class P P P P P 3. Demographic Trends P P P P P 4. Improved Infrastructure P P P P P 5. Political Decentralization P P P P P 6. Kenya as a Regional Hub P P P P P

A large housing deficit, growth of the middle class and demographic trends are just a few on the factors driving our thematic investments in Real Estate

13 13

Deal pipeline overview – 85% to low and mid-income housing

Kshs 53 Billion Deal Pipeline

Low to mid-‐income Housing 85%

•  Masterplanned Development

•  Comprehensive Development

•  Low to mid-income Modular Housing

•  High Density Integrated Mixed-use

•  Gated Communities

Prime ResidenPal and Mixed-‐use 15%

14 14

Summary of Projects - Kshs 53 bn Deal Pipeline Details •  Set 1: Real estate projects where the design, concept, agreements and funding are all secured, and have ground broken or in

the process of ground breaking

•  Set 2: Real estate projects where the Cytonn Real Estate team is in advanced stages of negotiations with the landowners, and

where consultants have been appointed to begin market research and concept design

all values in Kshs Millions unless stated Projects Concept Project Size

SET 1

Amara Ridge Gated community 625.0 Situ Village Gated masterplanned community 4,500.0 The Alma Middle-class residential development 2,744.0 Athi Sharpland Site & Service Scheme 644.7 The Annex Middle-Class Residential development 522.9 Rongai Sharpland Site & Service Scheme 375.5 Sub - Total 9,412.1

SET 2

Project Mombasa High density mixed-use development 3,750.0 Kiambu Road Middle-class gated community 3,832.0 Project Kitale Masterplanned development 700.0 Project Mavoko Low to mid income masterplanned city 12,500.0 Project Lukenya Low to mid income masterplanned city 22,500.0 Sub - Total 43,282.0

TOTAL 52,694.1

15 15

Cytonn’s strategy brings three key pillars together

1.  Crea1ng Jobs

2.  Growing the Economy

3.  Improving the standards of living

Financing Capability Development Capability

Landowners

16 16

II. Economic Review and Outlook

17 17

Stable interest rates and inflation at single-digit levels provide a conducive environment for growth

Summary Economic Outlook

Macro-‐Economic Indicators 2015 Experience 2016 YTD Experience Going Forward Outlook

GDP

Kenya’s GDP for the full year 2015 is expected to average 5.5% as per local, IMF and World Bank

projec1ons

Expected to improve with a conducive and stable

macroeconomic environment and tea exports improving for the year

We project the 2016 GDP to come in at an average 5.8% PosiPve

Interest Rates

The CBR increased 300 bps to 11.5% in August 2015 with the 91-‐day star1ng the year at a rate

of 11.7%

There has been a downward pressure on interest rates in January and February given

reduced pressure on government borrowing.

The CBR and KBRR rates were maintained by the MPC

Interest rates expected to remain on downward trend that will persist for the beYer part of

the year

Neutral

InflaPon (i) December infla1on at 8.0%

(highest for year)

Infla1on declined from the high of 8.01% in December through January to April at 5.3%

Expected to remain within the CBK target rising in September

when addi1onal VAT on petroleum is introduced

Neutral

Exchange Rate

The shilling depreciated 13.0% against the dollar from 90.70 in Jan

to 102.30 in Dec The foreign reserves improved to

4.5months by Dec 2015

The shilling has remained stable supported high forex reserves

transla1ng to 4.7 months of import cover as a result of the reducing

current a/c deficit. Kenya has received an increased credit facility by IMF to the value of USD 1.5

bn

Shilling to remain stable in the short term but will be under

pressure in the long term against major currencies and expecta1on

of Fed rate hikes

Neutral

18 18

Economic performance expected to pick-up on the back of a steady political environment and corporate earnings

Summary Economic Outlook, continued…

Macro-‐Economic Indicators 2015 Experience 2016 YTD Experience Going Forward Outlook

Corporate Earnings

The year experienced weak earnings from the listed banking sector with Core EPS growth of 2.8% in 2015. 17 listed and 1 unlisted company issued profit warnings as a result of a tough

opera1ng environment

Several companies have released posi1ve FY’2015 results, mainly manufacturing companies.

Bamburi, BAT, EABL and Kengen and banks KCB, I&M, Co-‐

opera1ve and DTB with profits ranging between 10%-‐20%

To improve due to the rela1vely improving interest rate

environment, stable shilling and improvement in credit growth

PosiPve

Foreign Investor SenPment

Increased flows out of Kenya owing to the US interest rate hike compared to inflows into equity markets as a result of vola1lity in

interest rates

Investor sen1ment has been high with foreign investors being net buyers in Q1’2016 with net inflows of Kshs 498.0 mn

Chinese economic slowdown and devalua1on of their currency may

lead to poor performance of most emerging and fron1er

market indices. However, Kenya’s NSE s1ll remains aYrac1ve to

foreign investors

Neutral

Security & PoliPcal Environment

Improvement witnessed in levels of security with tourism levels increasing in the month of December compared to the previous year and reduced

terrorist aYacks

Kenya has received an upgrade in credit ra1ng by Moody’s as a posi1ve indicator that the

environment is safe to carry out business opera1ons

Increased spending on security equipment and recruitment of

more personnel will enhance the country’s security, however

heightened tensions before the Na1onal elec1ons next year will

weigh on the poli1cal environment

Neutral

19 19

III. Kenya Insurance Sector Overview

20 20

Kenya’s Insurance Sector Overview Kenya currently has 49 insurance companies regulated by the Insurance Regulatory Authority

2012

2013

•  In Kenya there are a total of 49 insurance companies, 5 reinsurance companies and 198 insurance brokers. There are a total of

5,155 insurance agents in Kenya. The Insurance Regulatory Authority (IRA) is the regulator of all insurance companies in Kenya,

with a mandate to regulate, supervise and develop the insurance industry in Kenya

•  The minimum paid-up capital have been set at Kshs. 600 mn, Kshs 400 mn, Kshs 1.0 bn and Kshs 500 mn for the general, long

term, general business reinsurance and long term business reinsurance

•  Kenya’s insurance penetration stands at 3.1% compared to its peer countries in the Sub-Saharan Africa region

•  Kenya’s ratio of insurance companies to total population stands at 1.1x, with 49 insurers serving 44 mn people, compared to South

Africa’s 171 for 54 mn, Ghana’s for 52 for 26 mn and Nigeria's 60 for 181 mn

Insurance Penetration – Africa 2015

0.3% 0.7% 0.7% 0.8% 1.8%

3.1% 3.2%

6.0% 7.2%

14.0%

0.0% 2.0% 4.0% 6.0% 8.0%

10.0% 12.0% 14.0% 16.0%

Average = 3.8%

Source – Cytonn Research

Insurance Companies to Total Population

3.2x

2.0x 1.1x

0.3x

0.0

1.0

2.0

3.0

4.0

South Africa Ghana Kenya Nigeria

21 21

Growth in the Insurance Sector Alternative channels have been adopted to drive growth in insurance products in Kenya

2013

•  The Kenya Insurance Balance sheet stood at Kshs 460.6 bn

as of September 2015. The balance sheet recorded a 11.9%

y/y growth compared to September 2014

•  Total gross premiums stood at Kshs 134.9 bn at September

2015, with general business accounting for 65.1% of the

total gross written premiums

•  Gross reinsured premium accounts for 9.5% of the total

industry written premiums. The industry Retention Ratio for

the life business stands at 92.9% while the general business

stands at 74.2%

•  Life business has registered a much stronger growth in

premiums, posting a 20.2% CAGR compared to 18.8%

growth in general business

27.2 31.5

37.2

44.4

56.6

47.2

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 Q3'2015

CAGR = 20.

2%

Gross written premiums – Life business

Gross written premiums – General business

49.8 58.7

72.9 84.8

99.2 87.8

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 Q3'2015

CAGR = 18.

8%

Source: Insurance Regulatory Authority Q3 15 Insurance Report

22 22

Global Insurance Growth Kenya ranks high in premium growth globally and is leading in Sub-Saharan Africa

2012

2013

Source: Swiss Re Economic Research & Consulting.

23 23

Kenya Insurance Sector – Global Ranking Comparison

2012

2013

Name

P/B

P/E

ROE

Dividend Yield

Loss RaPo

Combined RaPo

Country

Allianz SE-‐REG 1.1x 10.5x 10.5% 1.6% 66.2% 96.1% Germany

American Interna1onal Group 0.8x 28.2x 2.23% 1.4% 77.5 % 112.4% United States

Assicurazioni Generali 0.9x 10.3x 8.7% 3.5% 66.6% 94.6% Italy

Aviva PLC 1.1x 19.1x 6..6% 4.8% 64.5% 94.6% Britain

AXA SA 1.0x 12.3x 8.8% 3.9% 70.1% 96.2% France

China Pacific Insurance 1.9x 14.2x 14.2% 2.0% 64.8% 101.7% China

Porto Seguro SA 1.4x 9.2x 16.1% 5.1% 63.8% 64.6% Brazil

Sampo OYJ 1.9x 13.1x 14.8% 4.4% 72.4% 85.4% Finland

Wafa Assurance 2.4x 14.5x 16.3% 6.3% 62.8% 78.0% Morocco

Zurich Insurance Group AG 1.1x 18.0x 5.6% 6.5% 71.8% 103.5% Switzerland

Select Global Average 1.9x 13.8x 12.0% 3.6% 68.1% 92.7%

Kenya Average (Listed)* 1.3x 9.4x 15.9% 1.8% 69.9% 110.6%

* - Metrics for Kenyan listed insurance companies only.

Source: Cytonn Research, Bloomberg

Kenya ranks at par with global players in most metrics, despite low penetration. However, in terms of combined ratio – we are worse off, showing the poor profitability of the core insurance business in Kenya

24 24

Insurance Sector Growth Drivers Alternative Channels of premium collection and regional expansion contribute significantly to premium growth in the sector

2012

2013

1)   Technology and Innovation: The industry players continue to innovate products. This increased competition has led to

companies embracing technology by making it possible to make payments through mobile phone and the internet. However,

much more needs to be done to target the growing middle class of uninsured Kenyans

2)   Growth of the Middle Class: In a region with one of the fastest population and economic growth rates, the rise in disposable

income is a great driver for the sector. Demand for insurance products and services has grown, for instance, motor insurance,

driven by the high rate of car importation into the country recently

3)   Adoption of Alternative distribution Channels: Insurance companies have been dynamic and fast in adopting to the new

alternative channels for both distribution and premium collection. With at least 2/3 of the countries' population having access to

banking services, improved agency networks through avenues like bancassurance will greatly shape the future of the sector. In

2014 for instance, life insurance business generated through insurance agents accounted for 56.5% of the segment's gross

written premium, with brokers and direct marketing accounting for 24.4% and 19.1%

4)   Regional Expansion: Given the low penetration rate in the region, global insurance companies have moved into the region to try

and widen their customer base. However, we hold the view that Kenya has remained under-tapped and more emphasis should be

put in growing insurance penetration in Kenya

25 25

Recent Developments in the Insurance Sector M&A activity and increased Risk Based Supervision are some of the notable developments in the sector

2012

2013

1)   Mergers, Acquisitions and Restructuring: There has been several mergers and acquisitions affecting the insurance sector in a

bid to take advantage of synergies and also as a way of the larger companies diversifying into both general and life businesses.

Notable acquisitions in 2015 included the acquisition of Real Insurance by Britam, Pan Africa insurance acquiring a 51% stake into

Gateway insurance to grow its general business line, the UAP-Old Mutual merger and Jubilee Holdings partnering with DRC’s

State-owned insurance company Sonas to offer medical and life cover products

2)   Entry of Global Brands: Given the low penetration rates in the country, global brands have ventured into the region with Saham

Group acquiring Mercantile Insurance, Prudential Financial Company (UK) acquiring Shield Assurance Company and Swiss Re

buying a stake into Apollo Group. The entry targeted at one of the fastest growing regions in the world

3)   Adoption of the Risk Based Supervision (RBS): The IRA is planning to introduce new capital requirements based on the

nature of business carried out by the insurers to try and match the risk activities of organizations to their core-capital

26 26

Recent Developments in the Insurance Sector, continued… 2015 was characterized by a volatile interest rate environment, as well as new mobile products to grow revenues

2012

2013

4)   Diversification of Investments: Insurance companies in Kenya have actively ventured into the real estate segment particularly in

the office space segment with the Britam and UAP towers coming up during the year. The adoption of asset management by CIC

and Pan Africa insurance has also seen the sector further diversify revenue streams aiming to grow their investment incomes

5)   Launch of Mobile Insurance Products: New products have also come into the market to improve the process of premium

collection with partnerships like the Orange Bima from a partnership by CIC, and Airtel also partnering with Pan Africa Life Assurance

Limited and MicroEnsure to create an insurance product covering Airtel customers in Kenya offering access to free life, accident and

hospitalization insurance based simply on how much they spend on the network

6)   Innovative Channels of Distribution: Insurance companies have come up with alternative channels of distributing their products,

including partnering with banks through bancassurance and the introduction of premium payments through mobile channels

7)   Lower Investments Returns: Given Insurance companies hold at least 8% of total government bills and bonds, volatility of

interest rates and subsequently yields on government bonds adversely affect mark to market investment returns. The poor

performance of the equities markets in 2015 also adversely affected the sectors

27 27

Insurance Sector Outlook Insurance sector expected to consolidate businesses, following adoption of a risk-based capital framework

2013

•  Mergers & Acquisitions: We expect mergers and acquisitions in the industry to accelerate in the medium term owing to the

increase in the minimum capital requirements as highlighted in the finance bill 2015. The amended Insurance Act comes into

effect in June and has adopted a risk-based capital adequacy system, with insurers covering high-risked businesses forced to raise

their capital levels

•  Micro Insurance: We expect the insurance players to progress towards tapping into this segment. The Kenyan informal sector

offers a rich platform to tap into, with increasing disposable incomes. We expect the industry players to innovate on products that

will be affordable and relevant to this segment

•  Devolved Government: With the establishment of a devolved system of governance, we expect insurance uptake to increase at

the county level, with (i) county governments taking up insurance services, and (ii) increased economic activity in the county

level, driven by more economic activities at the county level

•  Reduced Participation in Corporate Bonds: Following the new Capital Adequacy guidelines that introduced the concept of

Tier I and Tier II capital, capital can only be invested in Government bonds, Treasury bills, deposits, cash and cash equivalents

that constitute Tier I capital. This will significantly lower participation of Insurance companies in the Corporate Bonds market, as

corporate bonds are not eligible investments for Tier I Capital

28 28

Insurance Sector Market Share – Total Assets and Gross Premiums Non listed insurance companies, with 52.1% of industry assets, control 56.7% of gross premiums

2013

Non listed insurance companies are more efficient in asset utilization to derive premium growth – they have 52% of assets, and have 57% of premiums. However, efficiency of non-listed companies has declined; in

H1’2015 they wrote 73% of premiums with 55% of assets

Source – IRA, as at September 2015

Total Assets Market Share Gross Written Premiums Market Share

16.3%

6.4%

4.9%

14.1%

6.2%

52.1%

Jubilee Liberty CIC Insurance Britam Pan Africa Others

12.2%

6.2%

7.2%

11.1%

6.5%

56.7%

Jubilee Liberty CIC Insurance Britam Pan Africa Others

29 29

Listed Insurance Sector Metrics The insurance sector continues to register robust growth in terms of premiums, assets and equity, with net claims declining in 2015 by 6.7%. However, premium growth and asset growth has slowed from the steep increase witnessed in 2014

Net premiums (Kshs Bn) Net Claims (Kshs Bn)

CAGR- 22%

Shareholders Equity (Kshs Bn)

CAGR- 18%

CAGR - 16%

Source: Company Filings

Total Assets (Kshs Bn)

CAGR - 19%

23.9 30.9

38.8 45.4

60.4 64.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2010 2011 2012 2013 2014 2015

19.4 19.1

29.7 35.5

47.4 44.2

0.0

10.0

20.0

30.0

40.0

50.0

2010 2011 2012 2013 2014 2015

36.4 37.4 46.8

60.2

75.0 77.9

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

2010 2011 2012 2013 2014 2015

116.5 129.7 164.3

205.3

260.1 282.9

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2010 2011 2012 2013 2014 2015

30 30

Loss ratios remain under control, however expense ratios are at a 5 year high. In addition, solvency ratios are approaching dangerous lows on the back of asset growth outpacing equity growth

Loss Ratio (%) Expense Ratio (%)

Solvency Ratio (%) Insurance Penetration in Kenya

Source: Company Filings

48% 46% 48% 47%

44%

50%

20% 25% 30% 35% 40% 45% 50% 55%

2010 2011 2012 2013 2014 2015

28%

27% 26%

27% 26%

25%

20%

22%

24%

26%

28%

30%

2010 2011 2012 2013 2014 2015

2.40% 2.50%

2.60%

2.90% 2.90% 3.00%

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

3.20%

2010 2011 2012 2013 2014 HY 2015

Listed Insurance Sector Metrics, continued…

77%

68% 72%

78% 72% 70%

30%

40%

50%

60%

70%

80%

90%

2010 2011 2012 2013 2014 2015

31 31

Insurance Sector Multiples Kenya’s Insurance sector is trading at an average PBV of 1.3x and a PE of 8.7x

Source: NSE, Cytonn Data

(a) EPS of Kshs (0.5) results to a PE of (25.1x)

(b) PE adjusted for one-time impairment of goodwill

* Share prices are as at 26th April 2016

The Insurance sector has become cheaper on a PBV basis having declined to 1.3x, from 1.5x at the beginning of the year, due to a 3.9% y/y increase in book value and price dips since the start of 2016

Company Share Price*

No. Of Shares Issued (Bn)

Market Cap (Bn) P/BV P/E

Jubilee Holdings Ltd 472 0.1 28.3 1.4x 9.1x

Britam Holdings 13.3 1.9 25.8 1.4x N/A(a)

CIC Insurance Group 5.3 2.6 13.9 1.8x 12.2x

Kenya Re Insurance 19.8 0.7 13.9 0.6x 3.9x

Liberty Kenya Holdings 14.95 0.5 8 1.4x 11.4x

Pan Africa Insurance 42.5 0.1 4.1 1.1x 6.8x

Median 1.4x 11.4x

Average 1.3x 8.7x

32 32

Insurance Sector Multiples


Historical Price to book values: Banking and Insurance vs NASI

On a price to book valuation, listed insurance companies are currently cheaper than those in the listed banking sector and have normalized to historical trends. A direct correlation can be seen in the performance of insurance stocks with

that of the Nairobi Securities Index. However, in 2016, we have seen a decoupling, with banking valuations rising alongside the securities index, and insurance valuations dropping. We expect this to correct, with insurance

valuations to rise through price rallies to the historical 1.7x book value

Comparative look at Kenya financial sector shows insurance stocks are currently cheaper than banking

10-‐Year Average Banks 2.1x Insurance 1.7x

2.3x 2.3x

1.4x 1.6x

1.7x 1.5x

0.8x

1.5x 1.3x 73.4

68.0

162.9

145.7 147.0

0

20

40

60

80

100

120

140

160

180

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2008 2009 2010 2011 2012 2013 2014 2015 Q1'2016

Banking Insurance NASI

33 33

IV. Cytonn’s Insurance Sector Report

34 34

Executive Summary We undertook this report to offer investors a comprehensive view of the listed insurance companies

2012

2013

•  All listed insurance in the Kenyan market were analysed by the Cytonn Investment Team

•  The analysis was brought about by a need to be able to recommend to our investors, especially global investors, which

insurance companies are the most stable from a franchise value and from a future growth opportunity perspective

•  The analysis covers the health and future expected performance of the financial institution, by highlighting their

performance using metrics to measure Profitability, efficiency, diversification, risk appetite and solvency

•  For insurance companies which are part of a group structure, the financials of the group were utilised to take into

consideration the listed counter which an investor will purchase

•  Ranking based on a weighted average ranking of Franchise value* (40%) and Intrinsic value* (60%)

•  All the listed insurance companies are composite insurance companies, offering both life and general business. Kenya Re

Insurance is the only listed reinsurer

*See appendix for definition

35 35

Kenya’s Insurance Sector – Given turbulence in banking, is all well in insurance?

We expect increased regulation in the sector, as well as increased consolidation to reduce duplication of products by insurance companies

2013

Summary Impact on Insurance Sector Focus Area

Over-‐insured with low

PenetraPon

•  Insurance as a product s1ll needs to be sold in Kenya compared to financial services such as banking, which have become a necessity in Kenya

•  The sector s1ll has a lot of opportunity for growth, if correct distribu1on mechanisms are employed to grow awareness and subsequently grow premiums

•  With a posi1ve correla1on to disposable income, majority of Kenyan’s are s1ll priced out of policies

•  We are entering into a period of consolida1on in the insurance industry evidenced by the recent corporate ac1ons. However their strategy is confused as companies which are life are venturing into general

•  Similar to banking, the insurance sector is filled with too many players, with 49 insurance firms serving 44 million people, with no diversity in product offerings

•  However, unlike banking where financial inclusion is at 75% in Kenya, insurance penetra1on is only at 3%, and has been this way for long, with liYle signs of improvement

•  Like banking, the market has begun to see signs of consolida1on, with firms that are strong on distribu1on such as Britam, Pan Africa and Liberty acquiring Real, Gateway and East Africa Underwriters, respec1vely

RegulaPon

•  Proposed changes to the Insurance Act s1pulates guidelines on capital adequacy and risk charges on respec1ve investment op1ons

•  Following the recent turbulence in the banking sector, where improved supervision has exposed poor governance prac1ces, insurance could suffer a similar fate as regula1on 1ghtens

•  Annulment of law capping accident vic1ms pay, which placed maximum vic1m compensa1on at Kshs 3 mn is an example of tough 1mes for the sector

•  Increased risk based analysis on investments and deeper supervision on internal prac1ces by insurance companies is expected to shed shed light on companies that are poorly run

•  The increased supervision will lead to a 1ghter regulated sector, bringing confidence to investors,

•  In our view, limi1ng claims for accidents is not the correct way to bring discipline to the sector. A na1onal registry of drivers linked to their insurance and claim history will be more efficient. Premiums can then be priced off, and increased, for poor driving records

Revenue Diversity and

Product InnovaPon

•  Insurance companies are largely not profitable from their core business and diversifica1on of their revenues is key in profitability

•  Insurance products are not tailored to the common ci1zen and not innova1ve enough to target ci1zens with low disposable income

•  Increased penetra1on may not be a reality as ci1zens are unable to take up insurance

•  Increased compe11on as insurance companies become more innova1ve with their products and their distribu1on channels, while those that cannot shall be acquired or leave the industry

36 36

Rankings by Franchise Value Kenya Re emerged top in the franchise value rankings*, with Pan Africa coming last

2012

2013 •  The Insurance ranking assigns a value of 1 for the best performing insurance company, and a value of 6 for the worst

•  The rankings highlights profitability, efficiency, diversification, risk appetite and governance

•  Kenya Re maintained their number one ranking on the back of low expense and combined ratios, as well as the best solvency ratio

•  Jubilee as well maintained their 2nd ranking on the back of attractive ROaTE, as well as a lower ceded premium ratio

•  CIC improved from 5th previously due to a higher investment income / total income, showing revenue diversification, as well as moving

from last to first on underwriting leverage, which is a ratio of net premiums to shareholder’s funds, and their low ratio showing a high

capacity to absorb new business

•  Pan Africa remained last given their high ceded premiums, inability to absorb new business and a high reserve leverage, indicating that the

company has a lower ability to absorb sudden large shocks

Source: Cytonn Research * All metrics in the franchise value rankings are explained in slides 41 - 44 ** ROaTE- Return on Tangible Equity

Rank Company ROaTE**

Investment Income/Total Income RaPo

Loss RaPo

Expense RaPo

Combined RaPo

Ceded Premium RaPo

Solvency RaPo

UnderwriPng Leverage

Reserve Leverage

Corporate Governance

Score Total H1'2015

Rank

1 Kenya Re 1 6 2 1 1 5 1 2 1 2 22 1

2 Jubilee 2 3 5 2 2 2 4 3 5 3 31 T2

3 CIC 4 2 4 6 6 3 2 1 2 4 34 5

4 Liberty 3 4 1 5 4 1 5 5 3 5 36 T2

5 Britam 6 5 3 4 3 4 3 4 4 6 42 4

6 Pan Africa 5 1 6 3 5 6 6 6 6 1 45 6

37 37

Rankings by Total Potential Return Kenya Re was a clear leader in intrinsic value ranking, followed by Liberty Kenya Holdings

•  Kenya Re has the highest total potential return at 39.0%, which includes the highest dividend yield in the insurance market of 3.8%

•  Liberty Kenya Holdings had the second highest total potential return of 15.1%, with the firm paying no dividend

•  Pan Africa Holdings registered the lowest total potential return, with a downside of 8.2%


Company Current Price Intrinsic ValuaPon Upside Dividend Yield FY16e

Total PotenPal Return

Kenya Re Insurance Corpora1on Ltd 19.8 26.8 35.2% 3.8% 39.0%

Liberty Kenya Holdings Ltd 15.0 17.2 15.1% 0.0% 15.1%

Britam Holdings 13.1 14.6 12.2% 2.3% 14.5%

Jubilee Holdings Ltd 472.0 522.7 10.7% 1.8% 12.5%

CIC Insurance Group Ltd 5.3 5.1 (3.2%) 1.9% (1.3%)

Pan Africa Insurance Holdings Ltd 42.5 39.0 (8.2%) 0.0% (8.2%)

38 38

Cytonn’s Insurance Sector Report – Comprehensive Rankings When combining franchise and intrinsic rankings, Kenya Re was ranked 1st while Pan Africa was ranked 6th

•  In FY’2015, franchise value was assigned a weighting of 40% while the intrinsic value was assigned 60% weight, same as in H1’2015

•  Kenya Re ranked position 1 based on its high upside of 39%, and on a good franchise value backed by a low combined ratio of

70.6% vs. an industry average 110.6% and a high solvency ratio of 61.5% vs an industry average of 29.1%

•  Pan Africa Insurance Holdings ranks position 6 given its downside at 8.2%, and its high combined ratio of 126.5% vs a listed industry

average of 110.6% and a low solvency ratio of 14.6% vs a listed industry average of 29.1%


CYTONN’S FY’2015 INSURANCE REPORT RANKINGS

Company Franchise Value Total Score

Total Return Score

Composite FY’2015 Score

FY’2015 Rank

H1’2015 Rank

Kenya Re Insurance 22 1 9.4 1 1

Jubilee Holdings 31 4 14.8 2 2

Liberty Kenya 36 2 15.6 3 3

CIC Insurance 34 5 16.6 4 5

Britam Holdings 42 3 18.6 5 4

Pan Africa Insurance 45 6 21.6 6 6

39 39

V. Appendix

40 40

A. Metrics Used - Definitions

41 41

Insurance Sector Report – Metrics Used Cytonn has undertaken the analysis of listed insurance companies in Kenya using 10 metrics

•  Return on Average Tangible Equity – An Insurance Company’s return on average tangible equity (ROaTE), is the amount of

profit the company earns as a percentage of average tangible shareholders’ equity. It’s a profitability measure that shows how much

a company generates with the money shareholders have invested

•  Output – Insurance firms with higher ROaTEs are better at utilizing capital to generate profits

•  Investment Income/ Total Income Ratio – This ratio indicates the proportion of investment income that makes up total income

generated by the company. It is a measure of revenue diversification that shows how much revenue a company generates away from

its underwriting business

•  Output – Insurance firms with higher investment income to total income ratios have more diversified revenue streams, and

are less reliant on their underwriting business

•  Loss Ratio – An insurance company’s loss ratio is the ratio of its net claims to the net premiums. It is a measure of the company’s

ability to settle the claims from the premiums generated from policyholders

•  Output – A higher loss ratio indicates that the insurance company is using more of its premiums to pay out claims and are

more likely to be less profitable

•  Expense Ratio – This is the ratio of a companies operating expenses to its net premiums. It is a measure of efficiency of

management in generating premiums for the business written by the company

•  Output – A higher loss ratio indicates that the company is incurring more expenses in mobilizing more premiums, an indicator

of inefficiency of operations

42 42

Insurance Sector Report – Metrics Used, continued… Cytonn has undertaken the analysis of listed insurance companies in Kenya using 10 metrics

•  Combined Ratio - The combined ratio reflects both the cost of protection and the cost of generating and maintaining the business

•  Output - When the combined ratio is under 100%, underwriting results are considered profitable; when the combined ratio is

over 100%, underwriting results are considered unprofitable

•  Ceded Premium Ratio – Ceded premium ratio indicates the amount of gross premiums which insurance companies cede to

reinsurance. It is a measure of how much risk an insurance company is willing to take and diversify to reinsurance companies

•  Output – A low ceded premium ratio indicates a company has a high risk appetite to a company with a higher ratio. Also

extremely high ratios also indicates that the company may not be able to run its operations effectively

•  Solvency Ratio – This ratio is the amount of policy holder surplus to assets which indicates the amount of assets not required for

the payment of claim

•  Output – A higher ratio indicates that the company is more solvent and less likely to go bankrupt

•  Underwriting Leverage Ratio– This is the ratio of net premiums to shareholder’s funds. This ratio is inversely related to the

capacity of companies to write additional business because new policies generate liabilities, which must be supported by surplus due

to the limited liability of insurance companies

•  Output – A high ratio indicates that the capacity to write new business is low

43 43

Insurance Sector Report – Metrics Used, continued…

2012

2013

•  Reserve Leverage Ratio – This is the ratio of net claims to shareholder’s funds. This ratio represents an insurer's major unpaid

obligations as a percentage of net worth, and is inversely related to the firm's ability to bear loss shocks and errors in loss forecasting

•  Output – A higher ratio indicates that the company has a lower ability to absorb sudden large shocks

•  Corporate Governance Score – Given the recent developments in the Financial services sector, which include Dubai Bank and

Imperial Bank being put under receivership due to poor governance, we developed a 13th metric to measure corporate governance.

This is a ranking system where we analyse 25 metrics to rank listed companies on their corporate governance. Main areas of analysis

are in the board composition, audit functions, CEO tenor and evaluation, remuneration and transparency

•  Output: The score assumes a diffusion index with 50% as the base. Anything below 50% should be flagged as having serious

corporate governance issues while anything above is skewed towards proper governance. However the variance from 100%

gives the risk associated with corporate governance

Cytonn has undertaken the analysis of listed insurance companies in Kenya using 10 metrics

44 44

Insurance Sector Report – Metrics Used, continued… The rating of the insurance companies was done using franchise and intrinsic value

a.  Franchise Value Total Score: In this ranking, the insurance companies are ranked by health, by looking at metrics for

profitability, efficiency, diversification and risk appetite. The insurance companies are then assigned scores ranging from 1, which is

the best performing (re)insurer in the metric, till 6, which is the worst performing (re)insurer. The scores from each (re)insurer are

then summated, with the (re)insurer with the lowest total score emerging on top, and that with the highest score emerging at the

bottom

b.  Total Return Score: Potential upside for each (re) insurer based on the intrinsic valuation, and the current market price. The

(re)insurer with the highest upside was ranked 1st, and that with the lowest upside, or greatest downside, was ranked last.

Cytonn’s Analysts carry out this valuation, arriving at the actual value of each (re) insurer based on an underlying perception of its

true value, including all aspects of the business, in terms of both tangible and intangible factors, and future growth expectations.

This value may or may not be the same as the current market value

c.  Overall Rank: Using the Franchise Value and Total Return, insurance companies are given a score. Franchise value was assigned a

weighting of 40%, while the intrinsic value was assigned a 60% weight

45 45

B. Listed Insurance Companies

46 46

I. CIC Insurance Group

47 47

Company Description CIC has acquired a new IT system to enhance operational efficiency

•  Adoption of alternative channels, including bancassurance,

Sacco distributions, mobile and internet platform will drive

further growth while keeping the costs low

•  The entry into pension and annuity business expected to

drive further growth in the long term business premium

•  Expansion into regional markets to continue to offer extra

growth and diversification from the main domiciled market,

Kenya

Pros Cons

Developments During the Year

•  During the year 2015, CIC acquired a new IT system to enhance its medical business to enable the company to manage claims

processing, premium costing and computing business data

•  The group continued with its expansion strategy by opening several branches locally including opening a branch in Kitengela and

other major towns

•  Increased exposure to short term business characterized by

high and fraudulent claims

•  Credit risk with high levels of unpaid premium increasing a

liability load on the balance sheet

•  Pricing and undercutting risk with increased competition,

particularly in the short term business, growth in the

premiums is expected to slow down

48 48

Financial Statement Extracts – Income Statement CIC Insurance is projected to grow at a CAGR of 11.7% for the next 5 years

2013

Income Statement FY13 FY14 FY15 FY16 FY17 Projected 5 Year CAGR

Gross Premium Income 10.1 13.4 12.6 16.3 20.9 25.3%

Premium Ceded to reinsurers (0.9) (1.1) (1.9) (2.5) (3.3) 31.2%

Net Premium Income 9.2 12.3 10.7 13.8 17.6 24.1%

Fee and Commission income 1.0 1.2 1.6 2.4 2.7 20.2%

Investment Income 0.7 1.0 1.5 1.6 1.7 5.6%

Total Other Revenue 1.7 2.2 3.1 4.0 4.4 22.1%

Total Revenue 10.9 14.5 13.8 17.8 22.0 22.1%

Net Benefits and claims 6.0 8.6 7.3 9.1 11.6 23.4%

Total Expenses 3.2 4.5 5.2 6.6 8.0 21.6%

PBT 1.7 1.4 1.3 2.1 2.4 16.1%

Share of Profit from Associate 0.0 0.0 0.0 0.0 0.0 N/A

Income Tax expense (0.4) (0.3) (0.2) (0.6) (0.8) 33.1%

PAT 1.3 1.1 1.1 1.5 1.6 11.7%

Core EPS 0.50 0.47 0.43 0.56 0.63 11.7%

Change in Core EPS (16.7%) 4.4% 28.2% 12.5%

Source – Company Financials & Cytonn Estimates

49 49

Financial Statement Extracts – Balance Sheet CIC Insurance balance sheet is projected to grow at a CAGR of 16.0% for the next 5 years

2013

Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5 Year CAGR

Property and Equipment 1.1 1.2 1.3 1.3 1.4 7.3%

Investment proper1es 3.7 4.6 5.4 6.2 7.0 14.0%

Financial investments 12.3 17.8 18.1 23.7 27.2 18.0%

Total Assets 17.1 23.6 24.8 31.2 35.6 16.0%

Insuarance Contract liability 5.4 6.0 6.4 10.3 12.3 26.0%

Borrowings -‐ 5.1 5.1 5.1 5.1 0.0%

Other Liabili1es 5.3 5.5 5.5 6.8 8.1 18.0%

Total LiabiliPes 10.7 16.6 17.0 22.2 25.5 17.0%

Total Equity 6.4 7.0 7.8 9.0 10.1 13.0%

Total Capital and LiabiliPes 17.1 23.6 24.8 31.2 35.6 16.0%


50 50

Valuation Summary CIC is overvalued with a total potential return of (1.3%)

2013

Cost of Equity AssumpPons: 26-‐Apr-‐16

Risk free rate 12.6%

Beta 0.8

Mature Market Risk Premium 6.7%

Extra Risk Premium 0.0%

Cost of Equity 17.7%

Terminal Value AssumpPons 26-‐Apr-‐16 Terminal Growth Rate 5.0% Terminal ROE 13.0% Terminal Beta 1.0 Terminal COE 19.3% Jus1fied Price to Book value per share 0.6 Jus1fied Terminal Price (2020) 8.3 BV(2020) 15.9

ValuaPon Methodology Implied Price WeighPng Weighted Value

Intrinsic Valua1on 5.7 80% 4.6

Price to Book Approach 2.8 15% 0.4

Price to Earnings Approach 3.3 5% 0.1

Fair Value 5.1

Current Price 5.3

Upside/(Downside) (3.2%)

Dividend Yield 1.9%

Total PotenPal Return (1.3%)


51 51

II. Britam Holdings

52 52

Company Description Britam future performance is pegged on quality of the recent acquisition of Real and diversification

Recent Developments

Pros Cons

•  During the year, Britam acquired a 99.0% stake in Real Insurance, to expand its footprint in the wider Pan Africa. Real Insurance

Group has presence in seven countries in Africa

•  Britam’s IT enabled business platform, “Project Jawabu” went live in October 2015 and it’s expected to have a significant positive

impact on efficiency and quality of customer service

•  Strong growth in premiums continue to support growth both

in long term and short term business

•  Regional business will continue to drive premium growth, as

the region continues to offer growth opportunity driven by

the recent Real acquisition which has a wide footprint

outside Kenya

•  Asset management business will continue to drive and

diversify growth for the overall group driven by increased

uptake of investment management products

•  Increased exposure to the risky assets, like equites is expected

to increase the company’s risk adjusted losses

•  Competition, particularly in the long term business line will

continue to exert pressure on the premium growth

•  Fuzzy strategy to diversify income, with no firmed up real

estate projects apart from the Britam Tower

•  Going forward, the acquisition of Real Insurance will drive top-

line growth, but claims in general business remain high,

offsetting this growth

53 53

Financial Statement Extracts – Income Statement Britam is expected to grow at a CAGR of 10.3% for the next 5 years

Income Statement FY13 FY14 FY15 FY16 FY17 Projected 5 year CAGR




Commission income 0.4 0.6 0.7 0.9 1.0 13.1%



Total Revenue 15.1 20.7 20.1 23.8 27.3 11.0%

Net Benefits and claims 4.9 8.0 10.6 10.6 11.6 11.3%

Fee and Commission Expense 1.9 2.7 3.3 5.1 6.0 21.8%

Opera1ng Expenses 3.2 4.6 6.7 6.4 7.3 14.0%

PBT 2.9 3.0 (1.8) 1.7 2.3 6.6%

Income Tax expense (0.8) (0.7) 0.2 (0.5) (0.7) 10.5%

PAT 2.3 2.5 (1.0) 1.8 2.4 10.3%

Core EPS 1.2 1.3 (0.5) 0.9 1.2 10.3%

Core EPS Growth 7.9% (140.4%) 282.1% 29.3%


54 54

Financial Statement Extracts – Balance Sheet Britam balance sheet is expected to grow at a CAGR of 13.0% for the next 5 years

Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5 year CAGR

Property and equipment 1.2 1.3 1.7 4.6 6.0 25.4%


Financial Investments 16.3 21.2 17.3 12.7 13.8 11.9%

Other Assets 25.6 44.4 50.4 60.7 69.7 11.1%

Total Assets 46.9 72.5 77.6 88.7 101.5 13.0%

Insurance contract liabili1es 26.9 34.0 42.2 57.2 67.9 18.1%

Borrowings -‐ 6.2 6.6 7.0 7.0 0.0%

Other Liabili1es 5.2 10.9 11.1 5.5 5.9 2.8%


Total Equity 14.8 21.4 17.7 19.0 20.8 19.9%



55 55

Valuation Summary Britam is undervalued with a total expected return of 14.5%

Cost of Equity Assumptions: 26-Apr-16

Risk free rate * 12.6%

Beta 1.1

Country Risk Premium 6.7%



* Five years average yields on a 10 year Treasury bond

Terminal Value assumptions

Terminal growth rate 5.0%

Terminal ROE 18.1%

Terminal Beta 1.0

Terminal COE 18.6%

Justified Price to Book value per share 0.96

Justified Terminal Price (2020) 28.3

BV(2020) 29.3

Terminal Residual CF (1.0)

Valuation Methodology Implied Price Weighting Weighted Value

Residual Income approach 14.3 50% 7.1

Sum of The Parts 15.0 50% 7.5

Fair Value 14.6

Current Price 13.1

Upside/(Downside) 12.2%

Dividend Yield 2.3%

Total Return 14.5%


56 56

III. Liberty Kenya Holdings

57 57

Company Description Liberty Insurance issued a profit warning in 2015 citing turbulent markets

2012

2013

Developments during the year

•  Venture into alternative channels of distribution like

bancassurance and internet insurance

•  Customized insurance products that fit the needs of the

clients such as motor insurance tailor-made for women




particularly in the short term business, growth in the premiums

is expected to slow down

•  Liberty recently acquired 51% of East African Underwriters Limited in Uganda. Earlier acquisitions have been in Heritage Insurance

that is the general insurance arm of Liberty and CFC which is the life assurance arm

•  Liberty stated in 2015 that its profits for the year will be 25% lower than 2014 citing a decline in the values of the marked to

market financial instruments they had invested in

•  Liberty has branched out into other ways of distributing products to customers from the traditional salespersons such as

bancassurance through CFC bank and integrating Mpesa in their business systems

Pros Cons

58 58

Financial Statement Extracts – Income Statement Liberty is expected to grow at a CAGR of 15.7% for the next 5 years

2013








Total Revenue 7.4 8.3 8.3 9.5 11.5 16.5%

Net Benefits and claims (3.1) (3.5) (3.1) (4.1) (5.0) 21.8%

Total Expenses (3.0) (3.5) (4.2) (4.3) (5.2) 11.5%

PBT 1.3 1.3 1.0 1.1 1.3 17.9%


PAT 1.1 1.1 0.8 0.8 0.9 15.7%

Core EPS 2.08 2.12 1.37 1.48 1.77 15.7%

Change in Core EPS 2.0% (35.2%) 7.4% 20.0%


59 59

Financial Statement Extracts – Balance Sheet Liberty balance sheet is expected to grow at a CAGR of 12.0% for the next 5 years

2013


Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5-‐year CAGR




Other Assets 13.7 11.6 11.9 15.0 16.1 13.2%

Total Assets 31.5 32.7 34.8 39.2 43.6 12.0%


Borrowings 0.0 0.0 0.0 0.0 0.0 N/A

Other Liabili1es 15.7 16.8 18.2 19.6 21.2 7.9%


Total Equity 5.5 6.2 6.2 7.0 8.0 12.0%


60 60

Valuation Summary Liberty is undervalued with an upside of 15.1%

2013


Risk free rate 12.6%

Beta 0.7




Terminal Value AssumpPons 26-‐Apr-‐16

Terminal ROE 17.5% Terminal Beta 1.0 Jus1fied Price to Book value per share 0.8X Jus1fied Terminal Price (2020) 8.4 BV(2020) 9.9 Terminal Residual CF (1.5)





Fair Value 17.2

Current Price 15.0


Dividend Yield 0.0%

Total PotenPal Return 15.1%


61 61

IV. Pan Africa Insurance Holdings

62 62

Company Description Pan Africa Insurance Holdings acquired 51.0% of Gateway Insurance


•  During the year 2015, Pan Africa acquired 51.0% of Gateway Insurance, offering them an entry into the general insurance space. In

our view, Pan Africa’s acquisition of Gateway will only be beneficial if they can build on the combined platform of both life and

general insurance to enhance their distribution network

•  Pan Africa issued a profit warning stating that their FY’2015 results will be at least 25% less than what they reported the previous

year, mainly as a result of a bearish equities market where it is heavily invested, accounting for 20% of its total asset base

•  Venture into alternative channels of distribution such as

bancassurance

•  Has a strong actuarial risk function and was among the first

Insurance companies in Kenya to embrace this

•  Acquisition of Gateway Insurance gives it the chance to

venture into the general business space




particularly in the short term business, growth in the premiums

is expected to slow down.

Pros Cons

63 63

Financial Statement Extracts – Income Statement Pan Africa Insurance Holdings is expected to grow at a CAGR of 8.2% for the next 5 years








Total Revenue 8.5 8.0 7.2 8.3 9.7 17.1%


Total Expenses (1.7) (1.7) (2.8) (2.0) (2.4) 11.4%

PBT 1.5 1.2 0.1 1.3 1.5 9.6%


PAT 1.3 0.9 0.1 0.9 1.0 8.2%

Core EPS 13.03 9.07 6.28 9.39 10.93 8.2%

Change in Core EPS (30.3%) (30.8%) 49.5% 16.5%


64 64

Financial Statement Extracts – Balance Sheet Pan Africa Insurance balance sheet is expected to grow at a CAGR of 27.2% for the next 5 years

Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5 year CAGR




Other Assets 6.3 5.8 6.1 8.2 10.6 25.6%

Total Assets 21.2 24.6 27.1 34.6 43.9 27.2%


Borrowings 0.0 0.0 0.0 0.0 0.0 N/A

Other payables 2.9 3.4 3.6 4.0 4.7 15.7%


Total Equity 3.4 3.8 3.8 5.0 6.0 21.0%



65 65

Valuation Summary Pan Africa Insurance Holdings is overvalued with an downside of 8.2%

Cost of Equity AssumpPons: 26 -‐April-‐16


Beta 0.9




Terminal AssumpPons: 26-‐April-‐16 Growth rate 5.0% Mature Company Beta 1.0 Terminal Cost of Equity 19.3% Return on Average Equity 15.3% Jus1fied PBV 0.7x Shareholder Equity – FY20e 9.8 Terminal Value-‐(Year 2020) (2.8)


ValuaPon Summary: Implied Price WeighPng Weighted Value




Fair Value 39.0

Current Price 42.5

Upside/(Downside) (8.2%)

Dividend Yield 0.0%

Total PotenPal Return (8.2%)


66 66

V. Jubilee Insurance

67 67

Company Description Jubilee Insurance, the region’s largest general insurance provider


Pros Cons

•  Jubilee Insurance partnered with Diamond Trust Bank in a specialist referral model of bancassurance to increase uptake of life

insurance among the bank’s customers

•  Jubilee Insurance partnered with state-owned DR Congo insurer Sonas to offer medical and life cover products

•  Jubilee Holdings named Mr. Dietmar Raich as their new Group CEO

•  Jubilee Insurance partnered with Simba Colt Motors to offer 1-year insurance covers to owners of new Mitsubishi L200 single and

double cab pick-ups

•  As of June, Jubilee Insurance company of Kenya was ranked first with a market share with 12.6%

•  Jubilee’s retail medical product, J-Care, tailored for families was well received with Medical insurance business achieved a strong

growth in premiums of 32% to reach Kshs 10.03 bn from Kshs 7.62 bn in 2014

•  Jubilee has been able to consolidate its market leadership in

Kenya, Uganda and Tanzania making important market

share gains in Burundi and increased regional expansion

including its recent partnership with state owned Sonas of

DRC

•  Jubilee Life pioneered Bancassurance in 2003 and is now the

largest player in the Bancassurance arena with 11 partner

banks

•  Jubilee still maintains high combined ratios at 90% during the

year 2015 with the underwriting business in the industry not

being very profitable

•  Slow uptake of insurance in the Kenyan and regional markets,

driven by low education levels and high premium rates

68 68

Financial Statement Extracts – Income Statement Jubilee is expected to grow by a CAGR of 11.6% in the next 5 years

2013

Income Statement FY13 FY14 FY15 FY16 FY17 Projected 5 Yr CAGR


Premium Ceded to reinsurers (7.3) (8.4) (8.) (9.6) (10.9) 13.8%



Other Revenue 3.6 3.2 0.7 2.5 2.5 28.0%


Total Revenue 18.0 24.4 22.4 25.6 28.1 12.6%


Total Other Expenses (4.8) (6.0) (7.7) (8.2) (9.3) 13.6%

Share of Profit from Associate 0.9 1.4 1.0 1.1 1.4 10.0%

PBT 3.1 3.9 4.1 4.9 5.0 10.4%


PAT 2.5 3.1 3.1 3.9 3.9 11.6%

Core EPS 38.0 47.1 47.4 59.2 59.7 11.6%

Change in Core EPS 24.0% 0.6% 15.4% 0.9%


69 69

Financial Statement Extracts – Balance Sheet Jubilee’s balance sheet is expected to grow by a CAGR of 13.6%

2013

Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5 Yr CAGR



Investment Proper1es 4.4 5.1 5.5 6.1 6.8 11.0%

Other Assets 27.1 33.4 20.5 18.7 25.3 11.2%

Total Assets 61.2 74.5 82.4 89.7 106.8 13.6%

Insurance Contract Liabili1es 15.1 19.6 20.7 22.6 26.0 12.5%

Borrowings 1.3 1.4 0.0 0.0 0.0 0.0%

Other Liabili1es 31.4 37.0 41.3 43.7 54.5 10.7%


Total equity 13.4 16.5 20.4 23.4 26.3 20.3%



70 70

Valuation Summary Jubilee is currently undervalued with a total potential return of 12.5%

2013



Beta 0.8




Terminal Value AssumpPons 26-‐Apr-‐16

Terminal ROE 14.4% Terminal Beta 1.0 Jus1fied Price to Book value per share 0.6x Jus1fied Terminal Price (2020) 22.7 BV(2020) 35.9 Terminal Residual CF 22.8





Fair Value 522.8

Current Price 472.0


Dividend Yield 1.8%


* Five years average yields on a 10 year Treasury bond Source – Company Financials & Cytonn Estimates

71 71

VI. Kenya Reinsurance

72 72

Company Description Kenya Reinsurance increases its footprint in East Africa, with a 5% acquisition of Uganda Reinsurance

Pros Cons

•  Kenya Re is Retakaful Compliant. This is the Islamic

insurance that is an alternative for conventional insurance.

It has enabled Kenya Re to capture the Muslim segment of

the market. Takaful Insurance of Africa and mandatory

cessation as per government regulations ensures Kenya Re

has regular premium flows

•  Proactive approach in building industry capacity. By building

local capacity in the industry, Kenya Re is ensuring that

insurance for the oil and gas sector can be handled by local

firms instead of international insurance companies

•  Kenya Re management is politically elected as this may affect

the overall performance of the management

•  Insurance companies heavily reinsuring the insurance business

lines with the highest risks, thus increasing the amounts Kenya

Reinsurance has to pay out as claims

•  Kenya Re acquired a 5% stake in Uganda Reinsurance company at Kshs 20 mn. This was in order to maintain market share,

following the 15% mandatory cession of all reinsurance business in Uganda to the new Uganda Reinsurance company

•  Kenya’s government increased the mandatory cession to Kenya Re to 20% from 18% and extended the duration for mandatory

cessation by 5 years to 2020


73 73

Financial Statements Extracts – Income Statement Kenya Reinsurance has a high net premium growth with a CAGR of 15.6%

Income Statement FY13 FY14 FY15 FY16 FY17 Projected 5-‐ Year CAGR

Gross Earned Premium 9.6 11.6 13.1 16.3 18.7 15.6%


Net Premium Revenue 8.6 10.3 12.0 15.3 17.5 16.1%



Total Revenue 11.7 14.0 16.4 19.4 22.1 15.4%

Net Benefits and Claims (4.7) (6.0) (7.1) (8.3) (9.6) 14.3%

Total Other Expenses (3.7) (4.1) (4.8) (5.8) (6.5) 12.6%

Profit Before Tax 3.3 3.9 4.5 5.3 6.0 12.3%

Income Tax Expense (0.5) (0.8) (1.0) (1.3) (1.5) 16.0%

Profit for the Year 2.8 3.1 3.5 4.0 4.5 11.2%

Core EPS 4.0 4.5 5.1 5.7 6.4 11.2%

% Change in Core EPS 12.3% 13.3% 13.1% 11.2%


74 74

Financial Statements Extracts – Balance Sheet Kenya Reinsurance balance sheet expected to grow by a CAGR of 13.0%

Balance Sheet FY13 FY14 FY15 FY16 FY17 Projected 5-‐Year CAGR


Investment Property 6.5 7.2 8.0 8.9 9.9 16.3%


Other Assets 9.4 12.6 14.8 19.2 21.1 13.2%

Total Assets 27.6 32.2 36.0 42.5 46.8 13.0%

Insurance Contract Liabili1es 5.8 6.6 7.3 8.1 9.0 15.4%

Borrowings 0.0 0.0 0.0 0.0 0.0 0.0%

Other Liabili1es 4.8 5.6 6.7 9.0 8.6 7.9%


Total Equity 17.0 20.0 22.0 25.4 29.2 14.5%



75 75

Valuation Summary Kenya Reinsurance is undervalued with a total potential return of 39.0%



Beta 0.7




Terminal AssumpPons: 26-‐Apr-‐16 Growth rate 5.0% Mature Company Beta 1.0 Terminal Cost of Equity 19.8% Return on Average Equity 15.9% Jus1fied PBV 0.7x Shareholder Equity – FY20e 43.1 Terminal Value-‐(Year 2020) (11.5)






Fair Value 26.7

Current Price 19.8


Dividend Yield 3.8%



76 76

C. Investments & Research Team

77

Investment & Research Team

Shiv A. Arora Head of Private Equity, Real Estate Shiv serves as Head Private Equity, Real Estate at Cytonn Investments Management Limited. His experience within the financial services industry ranges from wealth management with Merrill Lynch Dubai to Ci1bank Kenya. Most recently, Shiv served as an Investment Analyst for Britam Asset Managers, focused largely on the Private Market segment, with a key focus on Real Estate. Shiv holds a BSc. Hons in Economics from the University of Warwick and is a candidate in the CFA Programme.

Maurice Oduor Head of Investments, Public Markets Maurice serves as an Investment Manager at Cytonn Investments Management Limited. He has over six years experience in investment industry having worked with two strong brands in Kenya. Before joining Cytonn Investments, Maurice served as Assistant Porqolio Manager at Britam Asset Managers Ltd focusing on porqolio management and clients rela1onship management. Maurice started his career at Genesis Kenya Investment Management Ltd as an investment Assistant with specializa1on in Fixed income analysis, investment dealing and porqolio management du1es. He holds a Bachelor of Business Administra1on (Finance op1on) from Maseno University and is currently a Chartered Financial Analyst (CFA) level III candidate.

Cytonn’s investment team bring with them vast experience in investment management

Elizabeth N. Nkukuu, CFA Partner, Chief Investment Officer Elizabeth serves as the Chief Investment Officer of Cytonn Investments Management Limited. She has over 10 years of experience in Investment Management. Before Joining Cytonn, Elizabeth was a Senior Porqolio Manager at Britam Asset Managers having come from Genesis Investments as an Investment Manager. Elizabeth started her career as an Investment analyst in PineBridge Investments. Elizabeth has a Master’s of Business Administra1on (MBA) Degree (Finance) from the University of Nairobi. In addi1on to being a Chartered Financial Analyst (CFA), she is also a CPA (K).

78

Duncan Lumwamu, BSc. Senior Investment Analyst Duncan serves as a Senior Investment Analyst at Cytonn Investments Management Limited. He has over four years of experience in Investment Research and Investment management. His experience ranges from research on local, regional and global equi1es, deal structuring and porqolio management. Before joining Cytonn Investments, Duncan held the posi1on of Head of Research at Dyer and Blair Investment Bank and ABC Capital. Duncan started his career at Britam Asset Managers as an Investment analyst. He holds a Bachelor of Science in Sta1s1cs degree from the University of Nairobi and he is a candidate in the CFA Programme.

Cytonn’s investment team bring with them vast experience in investment management

Caleb M. Mugendi Investment Analyst Caleb serves as an Investment Analyst at Cytonn Investments Management Limited. He is a graduate of the Cytonn Young Leaders Program, a pres1gious hands-‐on training on finance and investment management. His experience ranges from specializa1on in fixed income analysis, currencies and the financial services industry, having focused largely on the banking sector. He holds a Bachelor of Economics from KenyaYa University and is currently a Chartered Financial Analyst (CFA) level II candidate.

John Ndua Investment Analyst John serves as an Investment Analyst at Cytonn Investments Management Limited. He is a graduate of the Cytonn Young Leaders Program, a pres1gious and hands on financial and investments training program. His experience widely ranges from equi1es, fixed income analysis and financial modelling having focused largely on the financial services sector. He holds a Bachelors of Science Degree in Actuarial Science from the Jomo KenyaYa University of Agriculture and Technology. He is currently an actuarial candidate currently holding a Cer1ficate in Financial Mathema1cs from The Ins1tute and Faculty of Actuaries.

Investment & Research Team, continued…

79 79

Q&A In case of any queries or clarificaPons on this Listed Insurance Report,

kindly contact the Team at: E-‐mail: [email protected]

Tel: +254 (0)709 101 000 / 714 830744

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